Rex Energy: Improvements In Realised Pricing Reduces Its Breakeven Point To $3 Natural Gas

| About: Rex Energy (REXX)

Summary

Rex Energy is aiming for around 15% production growth by 2018, taking advantage of the lower interest rate on its second-lien notes in 2017.

The proceeds from its Warrior South sale should more than cover its 2017 capital expenditure excess over operational cash flow.

Breakeven point is reduced to around $3 Henry Hub natural gas due to improved differentials and realised pricing for NGLs (C3+) and Ethane.

Rex appears able to keep afloat after its second-lien notes jump to 8% interest in 2018.

However, its debt remains very large at over 8x estimated 2018 EBITDA at current strip prices. Equity remains of limited value as long as leverage is that high.

Rex Energy's (NASDAQ:REXX) two-year plan shows a company that is trying to grow its way out of its debt problem. It is taking advantage of near-term interest relief and using that extra cash flow to boost production by around 15% above current levels. The expectation for improved differentials and better realised pricing for NGLs (C3+) and Ethane in the future may allow Rex to reach breakeven at $3 Henry Hub natural gas even after its interest costs go up in 2018. However, Rex's debt load still remains very large compared to its EBITDA even with the increased production. More improvements (in production or in realized prices) are still needed to give Rex's equity intrinsic value.

Rex's 2017 Outlook

Rex is forecasting around 199 Mcfe per day in production in 2017, resulting in around $209 million in revenue at current strip prices. It looks like its hedges may have slightly negative value due to the relatively strong 2017 prices for natural gas.

Rex believes that its natural gas liquids (C3+) will fetch approximately 43% to 48% of WTI pricing in 2017 due to improvements in local differentials, compared to approximately 37% in Q3 2016. Actual differential improvement is something to keep a close eye on over the next couple years.

Units

$ Per Unit

$ Million

Oil and Condensate

273,750

$49.00

$13

Natural Gas

44,712,500

$2.70

$121

NGLs (C3+)

2,190,000

$25.00

$55

Ethane

2,208,250

$11.00

$24

Hedge Value

-$4

Total Revenue

$209

With $75 million in capital expenditures, Rex is expected to have approximately $230 million in total cash expenses for 2017. This results in a $21 million deficit, which would be covered by the $30 million in proceeds from Rex's sale of its Warrior South assets.

During 2017, the low interest rate on its second-lien notes allows Rex to have a relatively high capital expenditure budget and still avoid outspending cash flow (including its asset sale proceeds).

$ Million

Production and Lease Operating Expense

$127

Cash G&A

$16

Cash Interest Expense

$12

Capital Expenditures

$75

Total Expenses

$230

Rex's 2018 Outlook

For 2018, natural gas prices are expected to decrease around $0.20 per Mcf from 2017. The effect of this is partially offset by an anticipated $0.05 per Mcf improvement in Rex's natural gas differentials. Rex also believes that its realized price for Natural Gas Liquids (C3+) will improve by around 2% as a percentage of WTI oil, while ethane strip prices appear to be somewhat higher in 2018.

The various changes in commodity prices appear to net out to around a neutral effect including hedges, with Rex realizing around the same per Mcfe in 2018 as is 2017. Rex's production is expected to increase 15% to 228 Mcfe per day in 2018, while its revenues are also expected to increase by around 15% to $240 million.

Units

$ Per Unit

$ Million

Oil and Condensate

292,000

$50.00

$15

Natural Gas

46,537,500

$2.55

$119

NGLs (C3+)

2,372,500

$26.60

$63

Ethane

3,467,500

$12.00

$42

Hedge Value

$1

Total Revenue

$240

In 2018, Rex's interest expense is expected to go up to $53 million as the interest rate on its second-lien notes jumps back up to 8%. To compensate for this, Rex's capital expenditures will go down to $30 million at the midpoint of its guidance. With around $236 million in cash expenses, Rex would have around $4 million in positive cash flow in this scenario.

It appears that $30 million in capital expenditures is roughly what is required to hold Rex's production flat, as 2017's exit rate is expected to be near the 228 Mcfe per day average production (based on guidance midpoint) in 2018.

$ Million

Production and Lease Operating Expense

$137

Cash G&A

$16

Cash Interest Expense

$53

Capital Expenditures

$30

Total Expenses

$236

Conclusion

Due to the improved differentials, it appears that Rex is now capable of maintaining around 228 Mcfe per day in production at current strip prices in 2018 while spending within cash flow. Rex's breakeven point appears to be around $3 natural gas now, assuming that NGL (C3+) and ethane prices improve according to expectations. Rex's lowered breakeven point and increased production levels somewhat reduces the chances of a prepack filing by early 2018.

However, Rex's debt to 2018 EBITDA is still estimated at over 8x at current strip prices despite the higher production levels and improved differentials. Thus I believe that there remains a significant chance of a prepack filing before its debt matures since that leverage level would not allow for a refinancing of its second-lien notes. Rex probably needs to reduce its debt to EBITDA ratio to closer to 5x, which would require a significant upward shift in realized prices, or reduction of $250+ million in debt without significant sales of producing assets.

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Tagged: , Oil & Gas Drilling & Exploration
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